The US Department of Justice is prepared to sue Apple Inc. (NASDAQ: AAPL) and five book publishers for colluding to lift prices on electronic books according to a report in The Wall Street Journal. The publishers are Simon & Schuster, owned by CBS Corp. (NYSE: CBS); HarperCollins, owned by News Corp. (NASDAQ: NWS); Penguin USA, owned by Pearson plc (NYSE: PSO); Hachette Book Group, owned by Lagardere SCA; and Macmillan, owned by Verlagsgruppe Georg von Holtzbrinck GmbH.
Apple’s late CEO, Steve Jobs, struck a deal with the publishers in early 2010, that shifted the retail sales model from a “wholesale” model, such as was in force with Amazon.com Inc. (NASDAQ: AMZN) to an “agency” model, under which Apple would receive 30% of the retail price based on a price for the e-book set by the publisher. The deal also included a requirement that none of the publishers sell e-books to any other company at a price lower than the publishers charged Apple.
Amazon had acquired e-books under the wholesale model, and sold them at a steep discount in order to drum up business for its Kindle e-readers. The publishers believed that such discounting would lead to a severe loss of revenue, in much the same way that Apple had chopped the revenue of the music companies.
According to the WSJ, the CEO of Barnes & Noble Inc. (NYSE: BKS) gave a deposition to the US DoJ “ in which he testified that abandoning the agency pricing model would effectively result in a single player gaining even more market share than it has today.”
The DoJ’s position is that the agency model is anti-competitive and results in higher prices for consumers. A settlement of the potential suit is possible, but no such deal is close according to the WSJ’s sources.